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The US dollar has begun to strengthen again over the past two months, and this may well act as a headwind for gold price performance in the short term.
Despite this, the gold price has been resilient by historical standards, suggesting other demand forces are at work in the marketplace. Central bank buying continued apace in Q1 2023, following a record year for central bank buying in 2022 (1,078 tonnes). According to the Gold Demand Trends Q1 2023 report published by World Gold Council, gold’s demand reached 228 tonnes which is 34% higher in 2023 than the previous Q1 record – set in 2013 – and the highest Q1 gold demand figures in over 20 years.
In October 2022, the dollar reached its highest level in two decades, compared to other major currencies. However, since this peak, the trend has broadly reversed and dollar weakening up to July had provided somewhat of a tailwind for gold. More recently, the dollar has begun to strengthen again. The reason for the dollar reversal is multifaceted, although it is fair to say that the US economy is performing better than expected, recording higher wages and a resilient labour market, and thus reducing the probability of a US recession. This improved trading, along with higher energy prices feeding into the inflation number, has consequently increased the likelihood of a US interest rate rise next month, which could play into further dollar strengthening in the near term, and lead to lesser policy divergence to UK and European interest rate decisions.
As mentioned in an article published by Lombard Odier, ‘China’s growth disappointed with little prospect of major policy support while the eurozone’s biggest economy, Germany, dipped into recession and France recorded barely positive quarterly output. This growth divergence is consistent with modest dollar strength. The factors supporting the dollar look likely to remain in place through the rest of 2023.’
Since mid-July, the trade weighted dollar index, which compares the dollar against a basket of other major currencies, including the euro and sterling, has appreciated nearly 5%, and is not far off the levels seen at the start of the year. The direction of the dollar into year-end is likely to play a significant role in gold performance, as the price (GBP) settles back into the £1,500 (per troy ounce) support area.
The US Federal Reserve (Fed) kept interest rates on hold at a 22-year high of 5.25%-5.5% in its September 2023 meeting, in line with market expectations, but suggested there could be another rate rise this year. As per a news story on Reuters, Federal Reserve Bank’s Chair Jerome Powell spoke at a roundtable event in Pennsylvania on Monday stating that their focus is on achieving ‘a good labour market’, with no guidance provided on the near-term outlook for rates or the economy. Click here to read about the key points of Powell’s speech at Jackson Hole’s symposium.
In the UK, the bank rate was held fixed at 5.25% during last month’s meeting, in the wake of a surprise inflation reading which showed price inflation lower than expected, reading 6.7% for the year to August and coming in well below market consensus of 7%. This was the lowest monthly inflation reading since February 2022 and was primarily driven by lower food prices and gave some respite to UK policymakers.
Over the weekend, the US Congress averted a government shutdown by passing a bill ensuring Federal agencies continue to be funded, and therefore breathing some certainty back into the US economic picture and dollar assets. The first week of the month also brings the closely watched US non-farm payroll and US job openings data, which market watchers will be keenly observing as a guide to the continued strength of the US economy, and US dollar.
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References
- S&P 500 ends near flat; utilities drop, focus on rate outlook | Reuters
- Central banks | Gold Demand Trends Q1 2023 | World Gold Council
- Why the US dollar may be stronger for longer | Lombard Odier
(All sources referenced on 2nd October 2023)
